'Tracker' funds are meant to be simple and cheap – but some cost more than
rivals that employ expert managers

It's a bit like buying a "Value" product at Tesco and then finding that the "Finest" equivalent is cheaper.

Some funds whose main selling point is supposed to be cheapness can cost more than well-established funds with excellent track records and highly regarded managers. In other words, some "tracker" funds are more expensive than actively managed rivals.

Tracker funds are meant to be simple and therefore cheap. They dispense with stock picking and instead blindly buy those shares that are included in a particular stock market index, such as the FTSE 100.

This is a much cheaper way to run a fund than employing a professional manager and a supporting staff of analysts and researchers.

Mostly, customers see the benefits of these lower costs – some trackers, such as Fidelity's UK Index fund, charge less than 0.1pc a year. But not always.

There are rival trackers, also called "passive" funds, that charge 1pc a year, which is 10 times as much. Examples include the Virgin UK Index Tracking fund, which manages about £2.6bn of savers' money, and Halifax tracker funds including its FTSE 100 Index Tracking.

The M&G Index Tracker fund, which follows the FTSE All Share index and manages more than £500m, has a total charge of 0.46pc a year.

These fees are all "total expense ratios" or "ongoing charges figures", which give a more realistic idea of the true cost of running a fund than the more familiar "annual management charge", although even they exclude some expenses, notably the cost of trading. None includes commission for intermediaries.

So how do these annual charges on the most expensive trackers compare with some of the most widely recommended funds with human stock pickers?

One of Britain's most respected fund managers is Neil Woodford. The cost of his recently launched Woodford Equity Income fund is 0.75pc a year.

But there are several unit trusts (or the very similar "open-ended investment companies" or "Oeics") that have total charges of less than 1pc a year.

One is the Artemis Incomefund, managed by Adrian Frost and Adrian Gosden, whose fee is 0.79pc.

If we turn to investment trusts, there are some even lower charges around.

Unlike unit trusts and Oeics, investment trusts are quoted on the stock market and can borrow money to invest. Many were established in the 19th century and some have very long records of paying dividends.

For example, the City of London investment trust, which opened for business in 1891 and is managed by Job Curtis, levies a total charge of 0.44pc. The Scottish Mortgagetrust, established in 1909 and with a respected management team in James Anderson and Tom Slater, has a 0.5pc annual charge.

The Edinburghinvestment trust, founded in 1889 and until recently managed by Mr Woodford, charges 0.7pc a year.

The trust is now managed by Mark Barnett, who also took over Mr Woodford's Income and High Income funds when he left Invesco Perpetual this year.

There is even an investment trust tracker, the Aberdeen UK Tracker Trust. The annual charge is 0.3pc. But one quirk of investment trusts is that they can trade at a discount to the value of their underlying assets. At present the Aberdeen trust trades at a discount of about 5pc, so in effect you are offsetting the annual costs for 10 years or more.

Virgin said it had "no immediate plans" to reduce the charge on its tracker fund.

It added: "Cost is an important consideration in any investment decision, but it is not the only consideration. Most trackers impose minimum monthly payments, such as £50 per month, which is more than many of our customers want to save.

"We don't impose a minimum amount and over £1bn in the tracker is accounted for by investors who pay less than £50 per month. Smaller investments are costlier to administer."

Halifax said: "We don't currently have any plans to reduce this charge."

The cheapest ways to invest in funds

Usually when you pick a fund you have to weigh the charges against the quality of the managers and likely future performance, which of course is unknown.

Trackers, by contrast, all work the same way so cost is the most important factor. (One caveat to this is that some trackers have failed to do their job properly, perhaps by omitting the smaller stocks in an index, so check that your tracker uses "full replication".)

The cheapest unit trust trackers are currently offered by Fidelity, which charges 0.09pc a year for the UK tracker. If you own an expensive rival there is no reason not to switch.

But don't forget that choosing the right tracker is not the end of the story. Your choice of fund shop can also have a huge impact on the total cost of investing and therefore on your eventual returns.

For example, anyone who holds Fidelity's UK tracker through Hargreaves Lansdown, the largest fund shop, will find the 0.09pc fee dwarfed by Hargreaves's annual charge of 0.45pc.

AJ Bell Youinvest charges just 0.2pc a year, with a £200 cap. But if you have a large sum invested you may be better off with a "flat fee" outlet such as Alliance Trust Savings or Interactive Investor.

Alternatively, trackers are also available as "exchange-traded funds" or ETFs, which are officially shares and subject to a different charging regime.

Youinvest, for example, charges £9.95 to buy or sell ETFs but no annual fee to hold them.